Abstract
This paper explores the relationship between trade growth and long-run trends in real GDP growth from a purely empirical perspective. Its novelty lies in the way that it models trade growth: as a function of cyclical trends in real GDP growth. The main finding is that trade growth responds asymmetrically to deviations from long-run GDP growth. Generally, trade growth is positive and statistically significant when GDP growth is above the long-run trend. On the other hand, trade growth ceases but does not become negative when GDP growth falls below its long-run trend. While this behavior holds true broadly, individual countries’ trade growth may respond differently when GDP growth is above or below trend. Comparatively, low-income countries’ trade growth takes the greatest hit when economic growth slows, while lower-middle and high-income countries are least affected. These findings have potential implications for trade policy-making in the twenty-first Century especially given the current atmosphere of anti-globalization and slow trade growth.
